Business Has No Choice But to Manage Climate Change Options

Source: The Age/Australia
[Apr 21, 2006]

DEALING with climate change risks extends beyond corporate social responsibility. The potential for impact on corporate performance dictates that it can be identified as a financial risk and investors should be more attuned to how companies prepare to manage it, and where climate change presents opportunities for growth.

Superannuation trustees and others who are substantial holders of assets have a compelling reason, and the influence, to move climate change up the risk agenda. They should consider it within their duty of care to their beneficiaries to understand and address climate risk.

Climate risk distinguishes itself through its potentially widespread impact on companies, sectors and economies.

The agriculture, water, real estate and forestry sectors are more susceptible to climate change. But effects of climate change will not be contained to those sectors directly affected.

As governments increase efforts to mitigate climate change, the impact of these policies will be felt by businesses, in particular in the energy and automotive industries, potentially affecting profits and competition.

A practical framework for assessing the impact of climate change on the long-term performance of a company is to consider physical, competitive and regulatory risks.

Physical risks are the easiest to identify. This is the damage caused by floods, storms and rising seas. Sectors such as insurance, tourism and agriculture are particularly vulnerable.

Wider-reaching will be the impact of regulatory risks. Legislation to reduce greenhouse gas emissions, for example, will have the greatest effect on sectors with high emissions — oil, gas and electricity. Legislation could relate to the Kyoto Protocol, the European Union's emissions trading scheme and the NSW greenhouse gas abatement scheme.

There is an element of the unknown with regulatory risks because the laws and schemes designed to abate greenhouse gases are untested. For multinational companies there is the added burden of varied and conflicting laws across different operational regions.

But it's not all bad news for companies or investors — the challenges of climate change also present new opportunities. Companies that take early, positive action may secure a competitive advantage over others in their sector. By using energy-efficient technology companies can cut costs and greenhouse gas emission. Companies with good environmental policies stand to gain in terms of stronger relationships with authorities and local communities and enhanced reputation.

Most investors can make risk assessment, and there are options with varying levels of effort required. Superannuation trustees and investment managers have the ability to become active owners and put climate change risks firmly on the agenda. They have the power to encourage engagement with companies and other shareholders. They can take positive action such as encouraging the sell side to produce better research on responsible investment issues by allocating a proportion of broker fees.

Trustees can develop policies such as proxy voting guidelines that reflect an active approach towards climate change and related risks and select investment managers on the basis of their ability to incorporate these issues into their culture.

There are investment options that specifically incorporate climate change. These might include funds that invest in energy-efficient buildings, new markets such as emission trading or renewable energy companies. Equity and fixed-interest funds that actively consider environmental impacts are other options.

Climate change action is needed, and is happening now — investors who don't recognise this are putting themselves at increased risk.

Geoff Stewart is a senior associate at Mercer Investment Consulting, and is the specialist for Australasia for responsible investment.